Power of Sale Clause: Everything You Need to Know
A power of sale clause is a stipulation included in most mortgages that gives the lender the right to resell a property if the homebuyer defaults on the loan.3 min read
2. Power of Sale Clause Process
3. States that Allow Power of Sale Clauses
4. Power of Sale Clause Pros
5. Power of Sale Clause Cons
6. Deed of Trust Needed
A power of sale clause is a stipulation included in most mortgages that gives the money lender the right to resell a property if the homebuyer defaults on the loan. This is so that the lender isn't stuck with debt from the mortgage.
What Is a Power of Sale Clause?
The power of sale clause, or power of sale provision, works similarly to foreclosure, but with less supervision by the court. Foreclosures also give the lender possession of the property, but require a court order from the state. When the power of sale clause is included in the contract, a lender can repossess the property in the case of default without legal intervention.
Power of sale repossession tends to be a speedier process than legal foreclosure, yet they accomplish the same thing. While a power of sale clause is usually quicker and easier than foreclosure, it does come with some potential issues.
Power of Sale Clause Process
The requirements for power of sale clauses differ from state to state, but usually the process follows a few basic steps. First, once a mortgage borrower has defaulted on their loan (misses payments) they will receive a notice from their lender letting them know that they've lost the property. This will come in the form of a limited notice of foreclosure by mail or it may be published or posted.
Once the notice has been posted or communicated somehow, a third party individual or company, called a trustee, will handle the process. The property will be sold by the trustee through a foreclosure sale.
Mortgage lenders need to be careful to obey the state laws regarding the requirements for notifying their borrowers of defaulting and foreclosures. States stipulate timelines and procedures to be sure that borrowers are aptly warned of impending foreclosures.
States that Allow Power of Sale Clauses
You are allowed to use a power of sale clause in a mortgage or property contract in most states in the U.S. as a way of foreclosure.
The following 30 states usually allow power of sale clauses as foreclosures:
- Washington D.C.
- New Hampshire
- North Carolina
- Rhode Island
- South Dakota
- West Virginia
Power of Sale Clause Pros
There are some advantages to keep in mind for borrowers when it comes to power of sale clauses including:
- Option for a judicial review
- Deficiency judgment not allowed
Even though a power of sale foreclosure does not involve the court, a judicial review can be requested. Issues regarding the title or deed might need resolution from the court.
Deficiency judgments are not an option with power of sale foreclosures in some states. This means that if a borrower loses a property and the lender sells it, the borrower can't be held liable for costs not covered in the sale. For example, if a lender sells a foreclosed property for $60,000, but there was $80,000 of debt, the borrower can't be forced to pay the $20,000 difference.
Power of Sale Clause Cons
There are some disadvantages to the power of sale clause for borrowers as well. For example, the faster process means that borrowers who default on loans will lose their properties quickly. Foreclosures take longer, so a borrower might get a little more time in their home to figure things out.
Because there is no judicial review, if a borrower feels that they are being unfairly treated, they will only get a chance for a legal hearing if they file their own lawsuit, which is both expensive and time consuming.
Deed of Trust Needed
If a lender wants to use a power of sale clause for a foreclosure, they will need a deed of trust. This will put the property in a trust held by a trustee, instead of in the hands of the mortgage holder. So that trustee will actually resell the property in the event of a foreclosure. The property isn't in the hands of the mortgage holder during the sale, which means they can actually buy the foreclosed property.
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